Future of the Euro Zone, Austerity, and Quantitative Easing Up for Debate at the G8 and G20 Youth Summit

The finance committee of the G8/G20 Youth Summit is focusing on international monetary system reform and the crisis of the euro zone. This is one of the biggest challenges in finance since the 2008 financial and economical crisis.

The young diplomats began by debating the question of how to coordinate fiscal policies. For the Canadian delegate, the answer was easy: “Each country can set its own fiscal policy.” Indeed, there are lots of differences between the growth trajectory of the G20 countries. And there are also nations in severe deficits. Should they try to eliminate those deficits or stimulate their economies through spending? In the European Union, it should be possible to implement a lax fiscal policy like in the United States. It could be a fiscal easing policy and quantitative easy policies.

The European Union was very clear on this point: “the proposal of the Canada reduces deficit, but is a massive danger is terms of inflation. In the long run, it can backfire.” Printing more money is against the treaties in the EU. If it became possible to print more money, it would probably create a widespread global trend of inflation. “No one can say exactly what this would do to price volatility for sure, but it might trigger a global train of inflation.” For now, Europe is trying to reduce deficits through austerity.

The question of the crisis of the euro zone is a smaller piece of a much larger puzzle. For the IMF, “there are imbalances in our economies. Post-Crisis measures taken by the FED have showed that quantitative easing (QE) has promoted growth.” But it also affected different countries. This money was not always used to foster growth. A lot of money injected in the system went to emerging economies in terms of investments, which increased the differences in our macroeconomic monetary policies. At the same time, other countries like China accumulated huge reserves and hold American debt.

For the United States, “QE has occurred in two phases.” The domestic situation is limited due to domestic politics for future actions, but realistically, the only stimulus that is possible for further stimulation is another round of QE. The U.S. delegate was clear: “they probably pursue this policy.” The U.S. thinks Europe should use QE: “What they’re doing now hasn’t fixed the crisis. It’s just getting worse.” It proposes to make more IMF resources available but they “want more action from Europe before we commit even more measures through the IMF.” QE might be the only option we have there.

The delegates reached a consensus on the idea that long term objectives are to reduce deficits, and that price stability is in the long-term interest of most nations. But no policy is now clearly defined.